What is correct for increasing debtor collection period?
Answers
Answer:
In accounting the term Debtor Collection Period indicates the average time taken to collect trade debts. In other words, a reducing period of time is an indicator of increasing efficiency. It enables the enterprise to compare the real collection period with the granted/theoretical credit period.
Debtor Collection Period = (Average Debtors / Credit Sales) x 365 ( = No. of days) (average debtors = debtors at the beginning of the year + debtors at the end of the year, divided by 2 or Debtors + Bills Receivables)
Credit Sales are all sales made on credit (i.e. excluding cash sales) A long debtors collection period is an indication of slow or late payments by debtors.
The multiplier may be changed to 12 (for months) or 52 (for weeks) if appropriate.
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Explanation:
Answer:
Debtors turnover ratio, also called accounts receivable turnover ratio, is a ratio that is used to gauge the number of times a business is able to convert its credit sales to cash during a financial year. The collection period is the time taken by the company to convert its credit sales to cash. Both these ratios indicate the efficiency factor of the company in collecting receivables from its debtors and the speed at which they are able to do it. These two ratios are largely used to indicate the liquidity position of the company along with its efficiency with which operates. It also reflects the power the company has to dictate credit terms.
FORMULA FOR CALCULATING (DEBTOR’S) RECEIVABLE TURNOVER RATIO
Debtor’s Turnover Ratio = Net Credit Sales / Average Debtors